According to the latest information, the Federal Reserve kept interest rates unchanged at its May 2025 interest rate meeting, but warned at the same time that "the risk of rising inflation and unemployment is increasing", highlighting its policy dilemma under the risk of "stagflation". The market has different expectations for the July rate cut, but the core contradictions and possible future paths can be summarized as follows:

1. Current economic situation and policy dilemma

Pressure of "double storm"

Inflation stickiness: Although inflation has fallen from its peak in 2022, short-term inflation may be under pressure again due to energy price fluctuations and the Trump administration's tariff policy (especially in import-dependent areas such as automobiles and electronics).

Job market cracks: Although the overall unemployment rate remains low, the number of initial unemployment claims has continued to rise, some industries such as manufacturing have shown signs of weakness, and companies' willingness to recruit has cooled.

Policy contradictions: The Fed's dual mission (stable prices and full employment) is heading towards opposition. If both deteriorate at the same time, it will be forced to make a painful choice between "protecting employment" and "controlling inflation".

The Fed's wait-and-see strategy

Powell stressed that "there is no need to rush to act" and hoped to exchange time for data clarity and focus on observing the actual impact of tariffs on inflation in June and July.

The dot plot shows that officials have differences on the path of interest rate cuts this year: the "50 basis point consensus" predicted in March has been questioned by some hawks.

2. Analysis of market expectations and the possibility of interest rate cuts

The market is betting on a July interest rate cut

Although the Fed kept interest rates unchanged, the rebound of US stocks and the decline of US bond yields after the announcement of the resolution showed that the market still expected a possible interest rate cut in July.

The CME FedWatch tool shows that the market's probability of a July interest rate cut has risen to 59.1% (GF Securities data), but the probability of a June interest rate cut is only 19.8%.

Controversy over the extent of interest rate cuts

Some analysts (such as Kenneth Akintewe of Abrdn) called for a faster interest rate cut, believing that the current actual interest rate is too high (5.5% vs inflation 2.5%), and that it is necessary to release easing signals in advance to cope with the risk of economic slowdown in 2025.

However, the Fed prefers to cut interest rates cautiously and slightly (such as 25 basis points) to avoid sending panic signals and stimulating inflation rebound.

Key data determines the direction

Non-farm employment, CPI data and tariff lists in the next 1-2 months will be key. If employment deteriorates significantly, it may trigger an early interest rate cut; if inflation rebounds, the easing policy may be postponed.

Institutions such as Goldman Sachs believe that the degree of deterioration in the labor market is the core variable of interest rate cut decisions.

3. Historical mirror and potential risks

Lessons from stagflation in the 1970s

The Fed once failed to implement policies because of its swing between "maintaining employment" and "controlling inflation". The current limitations of tools (such as interest rate cuts may push up inflation, and maintaining interest rates will increase debt pressure) further increase the difficulty of decision-making.

External variables (oil prices, geopolitical conflicts, fiscal policies) are beyond the control of the Fed, exacerbating policy uncertainty.

Market risk scenarios

"Data redemption": If employment deteriorates significantly, expectations of interest rate cuts may temporarily boost risky assets.

"Stagflation nightmare": If inflation and unemployment rise simultaneously, it may lead to a double kill of stocks and bonds, threatening the credibility of the Federal Reserve.

IV. Institutional views and forecasts
Time window of divergence

Optimists (such as Tiffany Wilding of PIMCO): It is expected that interest rate cuts will begin in September and continue until 2026, because long-term inflation expectations are stable.

Cautious people (such as Matthias Scheiber of ALLSPRING): It is believed that the interest rate cut window may be postponed to after September, and the number of interest rate cuts in 2025 may be lower than the market's expectation of three times.

Radicals (such as Abrdn): Call for faster interest rate cuts to cope with the risk of long-term economic slowdown, emphasizing that policy transmission takes 6-8 months and needs to act in advance.

Interest rate endpoint forecast

The market expects that the federal funds rate may fall to 3.6% by the end of 2025, but the actual path depends on the trade-off between inflation and growth.

Conclusion: The possibility and conditions of a July interest rate cut
The possibility exists but there are doubts: The current market has a high probability of a July interest rate cut, but the Federal Reserve needs more data to verify the persistence of the "double risk". If employment data deteriorates significantly or inflation unexpectedly falls in the next 1-2 months, it may lead to a rate cut.

Risk warning: Cutting interest rates too early may stimulate inflation rebound, while cutting interest rates too late may increase the risk of economic recession. The Fed's "precise grasp" will determine whether it can avoid repeating the mistakes of stagflation.

Investors need to pay close attention to key economic indicators in June and July and the policy trends of the Trump administration to predict the timing and magnitude of the Fed's policy shift.